1. We dispose of these two appeals by the assessee by a common order since they involve common points. The assessee is an individual and the main source of his income is from salary. In the assessment for the years 1977-78 and 1978-79, there were two points of dispute. The first point is in respect of the perquisite value of a car kept at his disposal. The ITO had included Rs. 5,400 as perquisite value for both the assessment years. This was upheld by the Commissioner (Appeals).
The assessee is on further appeal before us.
2. We find that this identical point had come up before the Tribunal for the assessment year 1976-77. The Tribunal, after going through the facts of the case, had held that an amount of Rs. 1,200 could be treated as perquisite value. For the reasons stated in that order, we would direct that the figure of Rs. 1,200 be substituted for Rs. 5,400 for both the assessment years.
3. The second controversial point arises like this. The employer of the assessee is maintaining a recognised provident fund, to which both the assessee and the employees contribute. The interest credited to this provident fund was in excess of one-third of the salary of the assessee by Rs. 25,248 for the assessment year 1977-78 and Rs. 35,046 for the assessment year 1978-79. These amounts were shown by him in the returns filed for the respective years. So, the ITO included them for the assessment. However, thereafter, the assessee appealed against its inclusion. It was submitted before the Commissioner (Appeals) that under Rule 6(6) of the Fourth Schedule dealing with recognized provident fund, two conditions are given in respect of the interest which has to be treated as income. The conditions are that the interest on the accumulated balance should exceed one-third of the salary and that the rate at which the interest is paid also should exceed the official rate. According to the assessee, these are not alternatives but cumulative conditions. Unless both the conditions are satisfied, no addition could be made. The Commissioner (Appeals), however, rejected this submission. He pointed out that if they were alternatives, the rules would contain a directive "whichever is beneficial to the assessee". In the absence of any such expression, the submission that they are alternatives has to be rejected.
4. The assessee is on further appeal before us. Shri Mehta submitted that there is no dispute that the interest credited was in excess of one-third of the salary by the figures given in the assessment order.
He also submitted that there was no dispute that the rate of interest was the same as the rate fixed by the Central Government in the Official Gazette. But he submitted that the two conditions mentioned in the rule have to be construed as conjunctive and not disjunctive. The word "or" should be ascribed the meaning of "and". He pointed out that interpretation of statutes would require such a reading if the circumstances warrant. In Rule 6 itself, at the end of Clause (a) there is the word "and". This word clearly means "or". A plain reading of the rule would satisfy any one on this point. He further submitted that if the provisions in Clause (b) in Rule 6 were to be read disjunctively, certain hardships would be caused. In the case of an employee, who has agreed to work for no remuneration or for nominal remuneration, the interest credited to the balance in his provident fund could be in excess of one-third of his salary because it is quite possible that he might have been working for full remuneration in the prior years. He also submitted that the alternatives given had been deleted from the rules with effect from 1981. This shows, according to him, the intention of the Legislature in the interpretation of the section.
5. Shri B.N. Gupta for the department submitted that the assessee having shown these two amounts in the return itself, was agreeable to be assessed thereon and he cannot have any grievance in respect of that assessment. Therefore, the Commissioner (Appeals) ought not to have entertained this appeal at all. It is not as if, according to him, anything had happened to show that after he had filed the returns the excess interest was found to be not taxable. Apart from the preliminary objection, Shri Gupta also submitted that the wording of the section is very plain and it is not capable of the interpretation sought to be placed therein. He also pointed out, as the Commissioner (Appeals) did, that an expression like "whichever is less" is absent in the provisions. He further submitted that the arguments based on hardship are not at all material.
6. That portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund as consists of- (a) contributions made by the employer in excess of ten per cent of the salary of the employee, and (b) interest credited on the balance to the credit of the employee insofar as it exceeds one-third of the salary of the employee is allowed at a rate exceeding such rate as may be fixed by the Central Government in this behalf by notification in the Official Gazette, shall be deemed to have been received by the employee in that previous year and shall be included in his total income for that previous year, and shall be liable to income-tax.
The controversy is in respect of the provisions of Clause (b). The rule states that the interest credited on the balance to the credit of the employee insofar as it exceeds one-third of the salary or the interest credited on the balance to the credit of the employee is allowed at a rate exceeding the official rate is to be included as income. This is the reading preferred by the department. The reading preferred by the assessee is that these two conditions have to be satisfied before any addition could be made.
7. So, the dispute is in a narrow compass. Is the word "or" occurring in Clause (b) is conjunctive or disjunctive We may quote Maxwell On The Interpretation of Statutes. Maxwell says at page 232 : In ordinary usage, 'and' is conjunctive and 'or' disjunctive. But to carry out the intention of the Legislature it may be necessary to read 'and' in place of the conjunction 'or', and vice versa.
Conversely, the court may substitute 'and' for 'or'. An example is provided by the Bankrupts Act, 1603, which made it an act of bankruptcy for a trader to leave his dwelling-house 'to the intent, or whereby his ... creditors . .. shall or may be defeated or delayed'. If construed literally, this would have exposed to bankruptcy every trader who left his house, even for an hour, if a creditor called during his absence for payment. This absurd consequence was avoided by reading 'or' as 'and' so that an absence from home was an act of bankruptcy only when coupled with the design of delaying or defeating creditors.
Now, the above quotation would be a guideline as to when the word "or" should be construed conjunctively. If literal construction would lead to absurd consequences, then the expression ought to be read as conjunctive.
8. We may give an example of how the Supreme Court had referred to this rule. In the case of Mazagaon Dock Ltd. [1958] 34 ITR 368, the Supreme Court was construing the provisions of Section 42(2) of the 1922 Act.
That was a provision which enabled the department to estimate income in respect of a transaction between a resident and a non-resident. The provision contained the expression that "it appears to the Income-tax Officer that owing to the close connection between such persons... the course of business is so arranged that...either no profits or less than the ordinary profit.. .or which may reasonably be deemed to have been derived therefrom". The expression "or" was sought to be interpreted to mean disjunctively. The Supreme Court observed as follows at page 375 : The word 'or' in the clause would appear to be rather inappropriate, as it is susceptible of the interpretation that when some profits are made but they are less than the normal profits, tax could only be imposed either on the one or on the other, and that accordingly a tax on the actual profits earned would bar the imposition of tax on the profits which might have been received. Obviously, that could not have been intended, and the word 'or' would have to be read in the context as meaning 'and' : vide Maxwell's The Interpretation of Statutes, Tenth Edition, pages 238-239. But that, however, does not affect the present question which is whether the word 'derived' indubitably points to the business of the non-resident as the one taxable under Section 42(2), and for the reasons already given, the answer must be in the negative.
We may also refer to a decision of the Bombay High Court wherein the expression "or" was construed conjunctively. In the case of Yakub Versey Laljee v. CIT [1946] 14 ITR 548, the Bombay High Court was required to construe the provisions of Section 41(1) of the 1922 Act.
This provision contained a proviso. This is how the Bombay High Court dealt with the proviso : 'Provided that where any such income, profits or gains or any part thereof are not specifically receivable on behalf of any one person, or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown, the tax shall be levied and recoverable at the maximum rate.' In the first place in spite of the use of the word 'or' in that provision it is my opinion that 'or' in this context must be read conjunctively. There can be no point in having the two alternatives unless read as conjunctive ancillary to income, profits, or gains not being specifically receivable on behalf of any one person. But the difficulty in this case is caused by the second limb of this proviso. What is it which it is postulated may be indeterminable or unknown The answer must be, the individual shares of the persons on whose behalf the income is receivable. If the word 'individual' did not appear before the word 'shares' 1 think there would be little doubt that it would be quantum of the shares and not the identity of the beneficiary to which reference was being made. But the words of the statute are 'individual shares' and in my judgment that imposes a consideration of the subject-matter as well as the quantum. So that it has to be determined not only what is the quantum of the share but also who is the beneficiary, who is entitled to it, and the test must in my opinion be whether both the shares and the beneficiaries who are to take the same are not indefinite or unknown .... (p. 552) 9. With the above guidelines given by the authorities quoted, we would attempt to find out whether the expression "or" is used conjunctively or not. The scheme of the Act is to give encouragement for effecting savings. That is why deductions are allowed in respect of contributions made to the recognized provident funds, insurance premium, etc. On going through the rules pertaining to the recognition of a provident fund, it would be seen that except in Rule 6(b), the Legislature has provided for withdrawal from the provident funds for payment of taxes which would fall due in respect of any income arising in connection with the maintenance of the provident fund. We may refer to Rule 5(5) in this connection. This rule provides for an exception regarding withdrawal from the provident fund. According to this sub-rule, an employee can withdraw from the balance to his credit in the recognized provident fund, if tax becomes payable in respect of the transfer of a balance of an unrecognized provident fund to a recognized provident fund. This is the circumstance under which a situation would arise where an employee becomes taxable in respect of the contributions to the provident fund. The Legislature has recognized that the liability to tax has arisen not because the taxpayer has earned anything more but because of technicalities like where an unrecognized provident fund gets recognition.
10. The accretion to the provident fund would also not be entirely within the control of the employees who are contributing thereto. Under Rule 4, the trustees of the provident fund have to invest the contributions in trust securities and these trust securities on sale would give rise to capital gains and these capital gains are also considered part of the contributions. Thus, the assessee's share in a provident fund would increase for reasons which are not under his control. It would be seen, therefore, that the amount on which interest is to be calculated and credited is not an amount on which the employee has a control.
It follows, therefore, that the interest credited thereon can exceed 1/3rd of the salary for circumstances which are totally beyond the assessee's control ; at the same time, the assessee would be called upon to pay taxes thereon for which contingency the provident fund rules have not made any provisions.
11. We would also show that such contingencies are not rare. We will illustrate it with an example of an ordinary employee drawing a salary of Rs. 500 p.m.' His annual salary will be Rs. 6,000. Let us assume that he contributes 10 per cent of the salary and the employer contributes an equal amount, i.e., in the first year there would be Rs. 1,200 to his credit. Let us also assume that the interest will be at 10 per cent. So, the assessee will be having an interest of Rs. 120 in the second year. It will be seen that the credit of this employee in the course of about 8 years would be enough to be entitled to an interest which is more than 1/3rd of the salary, i.e., more than Rs. 2,000.
Thus, even in the case of ordinary employees drawing a salary of Rs. 500 p.m. in the course of about 8 to 10 years the interest credited would be subject to taxation under Rule 6(b).
12. It appears to us that this cannot be the intention of the Legislature. The Legislature would not have intended that the contributors to a provident fund who are generally small salary employees would be hit hard in this way and would not be allowed to draw from the provident fund to meet these tax liabilities.
13. Apart from this, the example given by Shri Mehta is also very striking. It is quite possible that an employee was previously getting a fairly high salary but, later on, due to circumstances, he is employed at a much lower remuneration. In such cases, the interest in respect of the balance in the provident fund would very easily exceed 1/3rd of the salary. Shri Gupta, for the department, had stated that this is a case of hardship, but it cannot be an argument in interpreting the statute. He is quite right in holding that the mere fact that a particular interpretation would cause hardship would not be sufficient to reject such an interpretation. However, we think that these illustrations would show not hardships but absurdities. Moreover, we cannot think that the Legislature would have intended in such situation that tax should be paid. We consider that the amendment of Rule 6(b) in 1981 was only to bring out the real intention of the Legislature and did not involve any change in law as such.
14. For these reasons, we are inclined to accept the submission that the word "or" should be construed conjunctively and only where interest allowed at the rates higher than the official rate and which interest had exceeded 1/3rd of the salaries, the said excess would be brought to tax under the rules.
15. Having disposed of the main ground, we will now refer to one or two subsidiary points taken by Shri Gupta. He submitted that the assessee had not claimed the exemption at the assessment and so there could not be any grievance in including these amounts in the assessment. We are unable to accept his submission that on this ground the appeal before the Commissioner (Appeals) was not competent. It is well settled that even though an item is offered for taxation before the ITO, the assessee could on advice claim later before the appellate authorities that the amount was not taxable. We do not think that the department's contention that the appeal is incompetent can be entertained. It was then submitted that in order to accept the assessee's contention, expression like "whichever is less" should also find a place in the rules. We have given examples from Maxwell and from the Bombay High Court decision wherein the expression "or" has been interpreted to be conjunctive but did not contain words similar to the expression "whichever is less". So, this is not a sufficient ground to accept the interpretation put by the department.